Banking & Finance
Mutual Funds: Financial Weapons of Mass Benefit
by Ali H. Shirazi
Director, Atlas Asset Management Limited
Warren Buffet is a prescient man. In his annual letter to shareholders of Berkshire Hathaway on March 8, 2003, he wrote “derivatives are financial weapons of mass destruction carrying dangers that, while now latent, are potentially lethal." After the subprime mortgage bubble burst in 2007, the esoteric credit default swaps which insured against default of securities tied to sub prime mortgages, collapsed. That brought the downfall of Lehman Brothers and pushed AIG to the brink.
Mutual Funds on the other hand are a force of good: product of the masses, for the masses. They have admirably withstood the pressures of the financial crisis and global assets under management have now started rising again. Mutual funds play an integral role in the world of finance, a force that has powered middle class growth, provided depth to capital markets and added dynamism to economies the world over. Long just a peripheral player in the world of capital markets, the mutual fund industry now commands the stage with $23 trillion in assets under management.
Yet the incredible muscle of mutual funds is still not appreciated by our policy makers. They at best consider mutual funds to be obscure products designed for wealthy individuals and large corporations. Much deeper analysis is required to appreciate how mutual funds have quietly revolutionized capital markets the world over and how they can serve Pakistan’s economy as an important component of growth. In Pakistan, without holistic reforms, the industry is likely to remain a bit part player unable to fulfill its unquestionable potential.
For individual investors mutual funds provide numerous benefits: access to professional investment management, diversification of funds in various asset classes, tax credit of up to Rs 300,000, ability to invest for as little as Rs 5000, liquidity offered by open end funds and transparency due to role of regulator and trustee.
More significantly, through individual investors, mutual funds have the ability to change the workings of the marketplace itself. For one thing, investors in equity funds, as they become financially more sophisticated, will grow more patient learn not to time the market and hold their investment in hope of high capital gains in the long term. As number of retail investors grows, depth of our capital market will increase and in time individuals and not a handful of corporations, will influence the marketplace.
It is axiomatic that savings are essential to the well being of individuals as well as Pakistan’s ailing, debt ridden economy. Pakistan’s savings to GDP ratio, 10 percent, is the lowest in the region. India’s savings rate has now touched 30%. It is no wonder then that we have a weak capital market and are entirely reliant on foreign debt to shore up our economy. Foreign aid and IMF loans are no substitute for domestic savings and investment. An essential condition for financial savings is a capital market that can provide accessible and economical instruments, such as mutual and pension funds, to enhance savings. Only savings will ensure sustainable, long term growth.
Drivers in Chile do not have to wait until retirement to enjoy the benefits of their savings. Every day thousands do so when they drive from Santiago to Vina del Mar along the recently opened toll road. The toll road was funded from the country’s deep-pocketed pension funds. A catchy slogan on a large billboard reminds passing commuters: “Your savings are financing this highway, and this highway is financing your retirement.”
The author is a Director of Atlas Management and is the CEO of Atlas Batteries Ltd. He is also a lawyer and a graduate of Yale University. Comments may be directed to firstname.lastname@example.org.
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